Thursday, July 9, 2009

I have a new post at AEI's American blog today comparing health care cost increases in the U.S. to those in other countries since 1990. The conclusion: we're about average, and nations with more centralized health provision haven't been all that better at controlling costs over the last decade and a half than have we in the U.S. Here's the key chart:

3 comments:

Are health care costs not continuing to increase at 2% faster than GDP growth?

If you are willing to use comparison to other countries as not providing better control of cost growth, why do not not make a similar comparison to controlling the level of costs.

For example, countries with greater share of government control do not control the rate of cost growth any better than the US (not true if you look over a longer period of time) but they are able to provide all their citizens with care for about half the cost per person, on average.

You argue that less government control may constrain cost growth, but clearly in many countries more control makes things much cheaper. Why not be consistent?

Finally, why are there differences in the level and growth of medicare costs across regions of the country considering medicare patients have the same tax liabilities and same cost sharing

All good comments. The answer is that the graph would look different and US growth would be higher. On average, US growth MUST be higher since we've gotten to higher levels of spending relative to GDP. But it does matter whether that unusually high growth took place in the recent or more distant past. My point was that, at present, we don't seem to have unusually high rates of excess cost growth.

The U.S. DOES spend more as a percentage of GDP than other countries. One reason for this is that our per capita GDP is higher, and health spending tends to rise disproportionately as GDP increases. On top of that, we have policy incentives that tend to encourage overspending, principally deriving from the tax exclusion for employer provided health care. On its own this drives spending higher -- if the average employee tax rate is say 35% (income and payroll combined) then a dollar of health coverage only costs the employer 65 cents. As a result, they'll tend to provide health coverage until it's worth less than 65 cents on the dollar. By itself, this is wasteful. On top of that, though, the tax exclusion tends to encourage coverage in which individuals pay high premiums and low copayments ("third party payer"). This also encourages overconsumption, much as an all you can eat restaurant encourages overeating.

Finally, you correctly note that medicare costs and quality vary from region to region. While an interesting point, I'm not sure what policy conclusions this leads to. As I understand it, the cost/quality relationship is tighter for private sector health care. Moreover, if the government can't manage cost/quality issues in Medicare, where they control pretty much everything, it's not clear how they'll improve private sector care without some pretty heavy-handed management.

1. Why does the level of growth by itself matter. What matters is cost growth is faster than income growth. Even though the growth rate is lower it still exceeds growth of income by similar amounts to previous periods. Health care spending will consume income at the same rate.

2. You state: "health spending tends to rise disproportionately as GDP increases". Spending in health care does rise with income (personal or national)--I think if you try to fit line to the data from the US you'll find it's a pretty linear relationship. What is DISPROPORTIONATE is how much more the US spends per person compare to other countries relative to our GDP. We spend about 30-35% more than a country with our GDP per capita would be predicted to spend. Surely you are familiar with this data. McKinsey did a fairly careful analysis of the factors accounting for our "excess" spending.

3. It's a bad habit of mind if not a defect, to find one explanation that partly explains the facts at hand and to suggest that this explanation is ins fact the most important or only explanation. The tax exemption probably explains some degree of more generous insurance coverage which to some extent raises spending beyond what is necessary. That said it is only one and not the major reason for high costs and fast growth. Other reasons costs are high and growing: use and diffusion of technology; inefficient delivery of care; the fee-for-service structure of insurance; aging; rising prevalence of obesity. CBO 2008 cites three studies attributing about 10% of growth in health spending from 1940-2000 to changes in 3rd party payments.

Of course there are other problems with this explanation rising to the level that is forms the primary basis for policy reform:a. Having any insurance at all probably raises spending more than having a slightly more generous coverage.b. despite the tax exemption many remain uncovered by insurance so presumably they underspend. Is this impact as large as the extent of overspending from generous plans.c. The most generous plans are results of negotiation with labor unions as much as they are an automatic reaction to tax rules.d. Utilization patterns are driven more by supply-side than demand side. e. Cost-sharing is in fact growing even though tax rates have not grown. Firms are choosing to offer so-called "consumer-directed" plans on their own, despite the exemption.f. Medicare spending is growing as fast as private spending even though there is no tax deduction. Cost sharing by beneficiaries is in fact increasing.

I am puzzled that you would not see some obvious policy implications from the data on cost variation, although I believe reforming the delivery of care-lowering cost by improving quality is possible without policy changes.

Restructuring payment incentives should, by your logic be a powerful way of helping reduce inefficiency. Fee-for-service insurance creates an incentive to over utilization. Ther are much better ways to structure incentives.

Medicare does not manage delivery of care. You know that. Ad hominem comments about the incompetence of government management is a sad reflex of your ideological commitments. Medicare could change payment incentives that would incentivize better care rather than more care. This is precisely your complaint about private "over-insurance".

Providers have far more impact on reducing costs by pursuing quality than consumers with slightly less generous insurance plans would.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.